Predictions for 2016: G7 on steadier footing than the E7

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Understanding what lies ahead is important for business planning. At the start of this new year, we have set out the key themes we think will prevail in the global economy in 2016.

  1. Smoother sailing for the G7: In our main scenario, the G7 will grow faster than 2% in GDP-weighted terms, which would be the fastest pace since 2010. In contrast, the E7 emerging economies will grow slower than their trend rate (but still faster than the G7). Within the E7, the Brazilian and Russian economies will contract and China will slow, but India will be the star performer (see Figure 1).
  2. Geopolitics (rather than economics) will be top of policymakers’ agendas:  Three geopolitical issues will continue to dominate the news headlines. First, the migrant crisis in Europe, which may slow down in the winter, but could flare up again in the spring. Second, the response of the international community to the crisis in the Middle East. Third, the referendum on the fate of the UK’s membership of the European Union. 
  3. Commodity prices will remain lower for longer: This will be good news for most businesses, households and policymakers in commodity importing economies, but a challenge for countries that rely heavily on commodity exports.

Our more detailed predictions for the year ahead have been compiled with input from senior economists from around our global network.1

The US will top the G7 GDP growth league table: The US economy will grow by almost 3% and so contribute to around two-thirds of overall G7 growth in 2016. The US will continue to create an average of around 200,000 jobs per month, helping to sustain consumer spending growth. But the US won’t have an easy run to the title of the fastest growing G7 economy. The UK will be its main rival as we expect it to grow within the range of 2-2.5% (see our separate predictions for the UK economy here). 

US and UK interest rates to rise in 2016: In December last year, the Fed led the way with its first rate increase since 2006. We expect it to continue to raise rates, albeit gradually, in 2016. Bar any major global accidents, we expect the Bank of England to follow suit at some point during 2016. 

However, a gradual tightening of monetary policy in the US could have wide global repercussions. For example, businesses and households with exposure to dollar-denominated debt will come under pressure as dearer funding costs will impact their finances. Economies such as Chile, Turkey and Russia could be particularly impacted due to their relatively high levels of US dollar debt, which stand at 37%, 25% and 24% of GDP respectively.

In contrast with the US and the UK, we expect the European Central Bank, the Bank of Japan and the People’s Bank of China to maintain an accommodative monetary policy stance in 2016.

The end of the Eurozone crisis: The peripheral economies will grow faster than the core economies for the second year in a row (see Figure 2). The Greek crisis could flare up again but this should not lead to contagion to the rest of the bloc, which is why we think this year should mark the end of the wider Eurozone financial crisis. With most imbalances in peripheral economies under control and structural reforms underway, such as Spanish legislation on promoting corporate financing, we think that Eurozone GDP will expand by around 1.6% in 2016, its fastest growth rate since 2011.

This pick-up in growth will be accompanied by businesses hiring more workers. As such, we expect the total number of unemployed people in the Eurozone to drop below 17 million during 2016, its lowest level since 2011.

India will be the star performer amongst the E7: For the second year in a row, we expect India to grow faster than China, expanding by around 7.7% in real terms. India will continue to reap the benefits of recent reforms. The cut in the policy rate by the Central Bank of India from 8% to 6.75% last year will help to support consumption and investment growth this year. 

Foreign direct investment in India’s underdeveloped manufacturing sector should also pick up as foreign investment caps have mostly been lifted.

Chinese GDP growth will ease to 6.5%: China’s economic slowdown looks set to continue with rebalancing now underway. Growth in manufacturing and exports will continue to slow gradually. However, Chinese business leaders will continue to move into higher value added areas of manufacturing. To meet this goal, we think overseas investment by Chinese companies will pick up, particularly through the acquisition of businesses involved in new technologies and R&D activities.

The internationalisation of the renminbi is expected to continue as more moves will be made to liberalise the capital account, including freeing up restrictions on IPOs. 

Finally, even though a hard landing is not part of our main scenario, it is still a significant downside risk that businesses should be mindful of as it could have particularly strong ripple effects across some of the South East Asian economies.

The GCC economies will start to reform their public finances: In the face of finite oil and gas reserves, ‘lower for longer’ energy prices mean that policymakers in some of the Gulf Cooperation Council (GCC) economies will face a challenging fiscal environment. In Oman and Saudi Arabia, for example, the IMF thinks that the government’s budget deficit could be close to 20% of GDP in 2016.

In the medium-term this is unsustainable. Policymakers will therefore start to put plans in place now to raise revenue in the short-term. One way they will do this is by selling large infrastructure projects to the private sector. Ultimately though we think some GCC countries will start to set up institutions to introduce medium-term fiscal frameworks.

Sub-Saharan Africa (SSA) will add ‘an Australia’ to the world’s population: SSA’s population will grow by more than 25 million people in 2016, which is larger than the entire population of Australia. This will be in line with past trends as SSA has added more than 20 million people per year to its population in every year since 2006. At a country level, Figure 3 shows that just under 20% of SSA’s population growth in 2016 will be driven by Nigeria alone (see our separate predictions for the Nigerian economy here). 

 

1John Hawksworth (UK), Andrew Sentance (UK), Andrew Nevin (Nigeria), Allan Zhang (China) and John Stell (US).

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Barret Kupelian

Senior Economist

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